Brazil’s January Inflation Expected to Show Signs of Temporary Relief

Inflation in Latin America’s largest nation is expected to start showing signs of temporary relief this year, but the central bank is likely to continue to raise interest rates as underlying price pressures remain.

Monthly IPCA consumer price index inflation is expected to decelerate largely due to some seasonal declines in travel and clothing, according to economists. Prices for both of those segments often go up in December as companies tap a Christmas bonanza, and then subsequently decline in January.

Monthly inflation is seen falling to 0.63% versus 0.92% in December. The 12-month rate is expected to slow to 5.67% for the 12 months ended January, down from 5.91% at the end of December, according to a survey with 12 economist by The Wall Street Journal.

Brazil’s next inflation figures will be released Friday by the Brazilian Institute of Geography and Statistics, or IBGE.

Despite the expected slowdown, price increases are likely remain above the official target. The government’s target for12-month inflation is 4.5%, although there is a margin of tolerance of two percentage points in either direction.

The ongoing inflation pressures probably mean the central bank will continue to raise interest rates. Espirito Santo Investment Bank‘s economic team said in a research report that the three-month moving average for IPCA inflation is running at an ”astounding” 7.2% in annualized terms.

“This is a backdrop that – in our view – contradicts the official position that inflation has been pressured solely by supply shocks,” Espirito Santo said.

Inflation spiked at the end of 2013, nudging the overall inflation rate above the level seen in 2012, a defeat for government officials who had insisted inflation would decelerate.

The central bank has already raised interest rates sharply to try to tame inflation. The Selic rate now stands at 10.5%, up from 7.25% at the beginning of last year. Another hike is expected when the central bank’s monetary policy committee meets later this month and, increasingly, economists foresee more rate hikes through the year. The market sees the Selic rising to around 13% this year, according to Nomura Securities.

A disagreement persists between the central bank and economists over the root causes of inflation. The central bank emphasizes problems that have hindered the supply of goods, such as droughts affecting food prices. Economists argue that there is simply too much demand: low unemployment, rising salaries and hefty government spending means there aren’t enough goods to go around.

Compounding the problems, the Brazilian currency has weakened sharply as markets struggle to cope with the prospect of tightening monetary conditions around the world. That move has been led by the U.S. Federal Reserve, which recently began to withdraw some of its bond-buying program. A weaker currency drives up the cost of imports into Brazil.

“In our view, inflation will remain under pressure this year, due to devaluation of the Brazilian real and also the increase in income in the latest months. We project inflation at 6% this year,” Banco Santander economist team said in a research report.

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